Workers’ compensation insurance costs eat up a small but significant percentage of labor costs. The U.S. Bureau of Labor Statistics says workers' compensation accounts for 1.2% of total compensation costs for private industry workers. Some employers end up paying much more, however – often because of their employer’s experience modification rate (also known as the ex-mod). Understanding how workers’ compensation rates are calculated and the role the experience modifier plays can help you take control of your costs.
Calculating Workers’ Compensation Insurance Rates
Several factors are used to calculate your workers’ compensation premiums. The most important factors include:
- Your payroll. The number of employees you have and the amount they earn will be used in your workers' compensation premium calculations. Premium rates are typically based on every $100 in payroll, but the cost per $100 in payroll will depend on the state.
- Worker classification. Some types of work are much more dangerous than others, which increases the chance of a workers’ compensation claim. The worker class factor accounts for different risk levels and is used when determining your rates.
- Your ex-mod (which is determined by your claims history). Companies with frequent or severe claims tend to pay higher rates for insurance coverage. This is true for workers’ compensation just as it is for other lines, such as commercial auto and general liability. Your experience modifier is based on your claims history and can result in higher or lower rates.
The Factors You Control
If you’re trying to reduce your workers’ compensation costs, you need to focus on the factors within your control.
- Location: According to the 2021 Workers’ Compensation Report from National Academy of Social Insurance (NASI), based on data from 2019, employers in Wyoming pay $1.98 per $100 in payroll, whereas employers in Texas only pay $0.52. In California, the cost per $100 in payroll is $1.61 and in New York, it’s $1.44. Given these numbers, it appears that companies could potentially save large amounts in workers’ compensation costs by moving to a state with lower costs. Of course, this may not be practical.
- Payroll: The amount of payroll for covered employees also has a significant impact on workers’ compensation costs. Companies with a larger number of employees pay a correspondingly larger amount for workers' compensation coverage. Therefore, it follows that a company could reduce its workers’ compensation costs by reducing the number of workers it employs. Once again, however, this probably isn’t a practical solution.
- Class code: The class code is another factor that is largely out of the employer’s control. Most states use the National Council on Compensation Insurance (NCCI) class code system. Each industry is given a code associated with a different cost. Some states may use a slightly different system, but the basic idea of charging higher rates for jobs that are associated with greater risk remains. There are many different codes, and classifications break industries down into specific categories. Since you don’t want to be assigned a riskier – and therefore more expensive – code by mistake, it’s important to make sure your codes are correct. However, beyond double checking for accuracy, there’s not much you can do.
- Ex-mod: The final determinant is the experience modification factor. This is where employers have the most control over their workers’ compensation insurance costs.
The Experience Modification Factor
Imagine there are two competing plumbing companies. Both are located in the same state. They have the same number of employees and provide the same plumbing services. One of the companies has had a high number of on-the-job injuries and associated workers’ compensation claims, including a few severe ones. The other company has only had a small number of minor claims over the years.
Should these two companies pay the same amount for workers’ compensation coverage? Many people would argue that they should not – and, indeed, the work comp insurance industry agrees.
The experience modification factor compares the loss experience of employers to others in the same industry. The average employer has an ex-mod of 1.0. Employers with an ex-mod less than 1.0 have fewer losses and are therefore rewarded with lower insurance rates. Those with ex-mods over 1.0 have worse than average loss experience, and therefore pay higher insurance rates.
Improving Your Experience Modifier
The best way to lower your workers’ compensation costs is to prevent injuries and illnesses by adhering to strong safety practices. You may not see results immediately – the NCCI says the experience modifier calculation usually uses the latest available three years of data. Nevertheless, the sooner you start improving your loss experience, the sooner you will see results. There are a few things you can do:
- Follow OSHA guidelines. Adhere to both general guidelines and those specific to your industry.
- Prioritize safety from the top down. If leaders are encouraging or modeling unsafe behavior, your company will probably develop a culture of unsafe practices regardless of your official policies.
- Train workers on safe best practices. If workers are unaware of the policies or don’t know how to use safety equipment properly, they may be at greater risk of injury.
- Watch out for common injury causes. According to the National Safety Council, the costliest lost-time workers’ compensation claims are caused by motor vehicle crashes. The average motor vehicle workers’ compensation claim cost $85,311 in 2019 and 2020. Burns as well as slips and falls are also costly injury types.
Understanding your experience modification rate can help you take control of your workers’ compensation costs. Do you need help securing reliable and affordable workers' compensation insurance coverage? We can help.